NEW DELHI: The Budget has proposed to decontrol diesel prices and reduce the number of subsidised cooking gas cylinders in the current financial year to eliminate yearly subsidy burden of Rs 140,000 crore.

"It is expected that the gap between administered price and market price of diesel would be eliminated by early FY2014-15. Thereafter, both petrol and diesel would be deregulated and linked to market prices, leaving PDS, kerosene and LPG subsidy," the Budget said.

According to oil ministry data, under-recovery stood at Rs 3.40 per litre on sale of diesel and at Rs 449.17 on sale of LPG cylinder. Diesel under-recoveries had fallen to Rs 1.65 per litre by June 15 but rose soon after the Iraq crisis. The government has been gradually increasing diesel prices by Rs 0.50 per litre every month.

Fuel subsidy in 2013-14 was about Rs 140,000 crore, of which diesel accounted for over Rs 62,800 crore.

"If there are no international shocks in the oil sector, it is expected that in a year the government will be able to decontrol diesel fully. With rising fuel subsidy, there is need to cap the subsidised cylinders at a more realistic level," the Budget said.

The move aims at reducing the government's total subsidy outgo on food, petroleum and fertilisers to 2% of GDP in the current financial year from 2.3% last fiscal.

"In order to achieve the fiscal targets of fiscal consolidation it is essential that government follows the policy of progressively reducing the expenditure on subsidy through improved targeting of beneficiary," the Budget said.

However, stabilisation of external exchange and stable international crude oil prices are critical in the process of rationalisation of diesel prices," it added.